TMI Blog2017 (2) TMI 691X X X X Extracts X X X X X X X X Extracts X X X X ..... components can be considered as a benchmark for Crystal goods as well. In such circumstances, applicability of CUP to a single combined international transaction of Import of Crystal goods and Crystal components, cannot be considered as the most appropriate method.We, therefore, countenance the view taken by the TPO in rejecting the CUP as the most appropriate method. TNMM vs. RPM - Held that:- We find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM is the most appropriate method for determining the ALP of the international transaction of `Import of Crystal goods and Crystal components’. We direct the AO/TPO to determine the ALP of the transaction of Import of Crystal goods and Crystal components, firstly, by applying the RPM. It is hereby clarified that the manner of application of RPM is open at large before the TPO who will decide it in the way he thinks expedient. Contention of the ld. AR that the comparables should be restricted to the ten companies which it cited before the ld. CIT(A) or twenty companies which the ld. CIT(A) suo motu c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arified that the amount of actual write off during the year should be allowed as deduction. The chart at page C-5 of the paper book shows such amount written off at ₹ 98,078/-. The AO is directed to verify if such amount has been actually written off in the books of account. If it is so, then, deduction should be allowed to that extent. As regards the Provision for doubtful advances unlike section 36(1)(vii) which provides for deduction on account of simple write off of bad debt subject to the fulfillment of conditions laid down in section 36(2), a write off of advances, falls in a separate compartment. In order to be eligible for such a deduction, the assessee is particularly required to prove the event of occurrence of loss. Unless the loss is proved to have been occurred, there can be no question of any deduction. Here is a case in which the assessee is claiming write off of an amount due from Customs Department. It goes without saying that no amount from a Government Department can be considered as irrecoverable under any circumstance so as to characterize it as a loss. We, therefore, following the view taken by the Tribunal in its order for the A.Y. 2002-03, uphold th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws that increase in the actual cost due to forex loss, and that too at the time of making payment, is not permissible but for this provision, which applies only to an asset acquired from a country outside India only. As the assessee acquired Building in India, neither section 43 nor section 43A can apply and consequently no capitalization of such forex loss can be allowed. We, therefore, hold that the authorities below were justified in denying depreciation on increase in the cost of `Buildings’ effected by the assessee due to translation of foreign currency loan at the end of the year. This ground fails. Disallowance of advertisement and publicity expenses - CIT(A) deleted this disallowance - Held that:- This issue is no more res integra in view of the judgment in CIT vs. Citi Financial Consumer Fin. Ltd. (2011 (3) TMI 622 - Delhi High Court) in which it has been held that the entire expenditure on publicity and advertisement is allowable fully in the year in which it is incurred. We, therefore, uphold the impugned order on this score. Similar view has been taken by the Tribunal in the assessee’s own case for the A.Y. 2002- 03. It is however, made clear that no further deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CGD and CCD are designers and garment manufacturers etc. The assessee reported certain international transactions in Form no. 3CEB. The Assessing Officer (AO) referred the matter of determination of their arm s length price (ALP) to the Transfer Pricing Officer (TPO). Reported international transactions include a transaction of Import of crystal and crystal components with transacted value of ₹ 6,64,22,297/-. Only this international transaction is under dispute. The assessee applied Comparable Uncontrolled Price (CUP) method to demonstrate that the international transaction was at ALP. In order to fortify the adoption of CUP as the most appropriate method, the assessee argued that the imports were made as per the price list provided by its AE which was available for all its sales to group companies (internal comparable). It was also submitted that its AE also made direct sales of Crystal components to Indian customers and the amount charged from such independent customers was higher than that charged from the assessee (external comparable). The assessee submitted that it was also taking orders on behalf of its AE from customers in India and forwarding the same for execution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord. Only the international transaction of `Import of crystal and crystal components out of the reported transactions is in dispute inasmuch as all other international transactions reported by the assessee have been accepted at ALP. The first quarrel is on the selection of method as the most appropriate method. Whereas, the assessee applied CUP as the most appropriate method to show that the transaction was at ALP, the TPO discarded the same and opted for the TNMM. Whether CUP is the most appropriate method ? 4.1. Before considering the question of CUP being a most appropriate method, let us understand the precise nature of the international transaction. This import transaction comprises of two things, namely, Crystal goods and Crystal components for which there are separate divisions, namely, CGD and CCD. Import of both the Crystal goods and Crystal components has been shown as one international transaction and there is no further segregation. The assessee s Transfer pricing study report has been placed at pages B-375 onwards of the paper book. Page B-395 clarifies that the domestic unit of the assessee trades in two types of goods, one is Crystal components and the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fluenced by certain other extraneous factors thereby reducing the reliability of comparability. However, in order to successfully apply this method, it is sine qua non that the goods purchased or sold must be compared with similar goods. Thus, the fundamental thing is that the goods in an international transaction must be similar to those in comparable uncontrolled transaction if a valid comparison is to be made. Of course, some adjustments can be made for bringing a similar product to the rank of an identical product, which is subject matter of the consideration. If goods in the international transaction do not exactly match with the goods in comparable uncontrolled transactions, then this method loses its charm and becomes inapplicable as it cannot properly reflect the ALP of the goods purchased by the assessee from its AE. It is vivid that an apple can be compared with an apple alone and not an orange. Some difference in the quality of apples in the international transaction and comparable uncontrolled transaction can be adjusted under sub-clause (ii), but in no case an apple in an international transaction can be compared with an orange, both of which are materially different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not prove the case. In our considered opinion, the relevant factor is the price charged by the AE from the assessee and unrelated parties. Such price is charged w.r.t the costs incurred and the profit that it intends to earn. How the buyer is going to use the products purchased from the AE is not determinative of the price which the AE is going to charge from the sales made by it. Be that as it may, the contention of the Revenue, if accepted, would rather support the case of the assessee. If the assessee is bargaining hard and making cheap purchases from its AE in comparison with the price paid by the non-AEs, that will lead to the resultant higher profit to the assessee, if other things are equal. Transfer pricing adjustment under CUP method is called for when the comparable price in the uncontrolled transactions is less than that paid by the assessee and not vice versa . In our considered opinion, this factor raked up by the TPO has no bearing insofar as the determination of the ALP of the purchase price is concerned. 4.5. We, therefore, countenance the view taken by the TPO in rejecting the CUP as the most appropriate method. TNMM vs. RPM 5.1. Having held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Profit Margin (%) 4.77 4.8 -1.83 8.36 Return on shareholders Funds (%) 49.01 69.03 -43.01 87.5 Return on capital Employed (%) 30.58 23.11 -4 33.29 Solvency Ratio (%) 26.73 17.76 11.48 19.99 5.3. The TPO mentioned below the table that Swarovski, Korea made a gross profit margin in the region of 48% to 58% during the period 31.12.2002 to 31.12.2005 and net profit margin in the range of 1.9% to 7.7%. 5.4. Then, he tabulated figures of Swarovski, Singapore in relation to five Calendar years from 1999 to 2003 in para 7.3 of his order, as under:- SWAROVSKI SINGAPORE TRADING PTE LTD. FINANCIAL PROFILE Unconsolidated data 12/31/2003 12/31/20042 12/31/2001 12/31/2000 12/31/1999 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be in the same range as earned by Swarovski, South Korea and Swarovski, Singapore. He, thus, held that 4.185% was arm s length margin for the assessee company. A further adjustment of 5% on such arm s length margin was given on account of geographical region and market size, etc., thus, working out arm s length margin at net level of 3.976%. By applying such arm s length margin, he worked out transfer pricing adjustment amounting to ₹ 5,70,90,836. Thereafter, he ventured to make a Secondary analysis using gross profit margins. In the discussion contained in para 8.2 onwards of his order, the TPO noticed the margin of Swarovski, South Korea at gross level of 53.75% was comparable with the gross profit margin of 20 comparable companies from the ORBIS database. By applying gross margin of 53.75%, he computed transfer pricing adjustment of ₹ 3.74 crore. In para 8.5, he discussed that the amount of adjustment is different in the Primary and Secondary analysis, namely, by applying net and gross level margins. Eventually, he averaged the amount of adjustment computed under both the methods for proposing a final transfer pricing adjustment of ₹ 4,72,74,425/-. This is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect the amount of net profit margin in the open market ; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction. 5.11. Sub-clause (i) of the above rule, being the first step, provides that the net profit margin realized by the enterprise from an international transaction should be computed in relation to a base, such as, costs incurred or sales effected or assets employed, etc. Sub-clause (ii) provides that the net profit margin realized by the enterprise from the comparable uncontrolled transaction is computed having regard to the same base. Sub-clause (iii) provides that the net profit margin realized by a comparable company, determined as per sub-clause (ii) above is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin. It is this adjusted net profit margi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n uncontrolled transaction is always between two nonassociated enterprises. A transaction between two associated enterprises is considered as a controlled transaction and hence goes out of the ambit of Rule 10B(1)(e)(ii). Both Swarovski, South Korea and Swarovski, Singapore are associated enterprises of the assessee and their transactions are with their respective AEs, thus making them controlled transactions. Hence, these cannot be considered as comparable uncontrolled transactions. In so far as the calculation of margin of 20 independent companies is concerned, we find that one of them is Swarovski Singapore Trading Pte Ltd., whose business model is again similar, thereby making it a controlled transaction. All the remaining 19 are foreign companies. The assessee distinctly placed a chart before the ld. CIT(A) which has been reproduced on page 12 onwards of the impugned order showing that all the 19 foreign companies were engaged in altogether different lines of business, such as, Sports goods, Bicycle shops, Manufacture and trader of shoes, Drug proprietors and sundries, Dealer of raw material for construction products, Grocery and related products, Purchase and sale of electric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions ; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services ; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market ; (v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm s length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise ; 6.4. A perusal of the above mandate transpires that sub-clause (i) of Rule 10B(1)(b) provides that the price at which the goods purchased by the enterprise from its AE are resold, is identified. Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some of the otherwise functionally comparables make available the relevant figures without any need to make allocation or truncation, then the number of comparables should be restricted to such companies. If there remains no such comparable having requisite figures for determination of gross profit rate from purchase and resale of similar goods, or if the relevant figures of the enterprise itself from purchase and resale of goods under consideration are not available, then, the RPM cannot be applied and it should be dispensed with. In such an eventuality, the next best method should be applied. 7. In view of the foregoing discussion, we set aside the impugned order on this score and direct the AO/TPO to determine the ALP of the transaction of Import of Crystal goods and Crystal components, firstly, by applying the RPM. It is hereby clarified that the manner of application of RPM is open at large before the TPO who will decide it in the way he thinks expedient. Contention of the ld. AR that the comparables should be restricted to the ten companies which it cited before the ld. CIT(A) or twenty companies which the ld. CIT(A) suo motu chose for making TP adjustment on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determination. There are three recent judgments of the Hon ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd . (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra) . Respectfully following the predominant view of the Hon ble High Court, we are of the considered opinion that it would be in the fitness of things if the impugned order is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter would end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments of the Hon ble High Court, after allowing a reasonable opportunity of being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed on record a copy of the order for the A.Y. 2003-04. It was only on a pertinent query from the Bench that the tribunal order for the A.Y. 2002-03, deciding similar issue against the assessee, was brought to the knowledge of the bench. In all fairness, it was the duty of the parties to suo motu place a copy of the earlier order on the same issue before the tribunal during the course of the proceedings for the A.Y. 2003-04. Similarly both the orders ought to have been placed before us as well without asking. 10.4. Notwithstanding the diagonally opposite views taken in the orders for the earlier years on the same issue, we proceed to examine the issue afresh. Provisions for doubtful advances disallowed by the AO amounts to ₹ 19,08,162/-. The ld. AR claimed that the amount is deductible u/s 36(1)(vii) of the Act. Section 36(1)(vii) provides that: subject to the provisions of sub-section (2) the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year is deductible. This shows that two conditions must be simultaneously satisfied for becoming eligible for deduction u/s 36(1)(vii). The first is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jaya Bank vs. CIT (2010) 323 ITR 166 to bolster for the claim of deduction. This decision, in our considered opinion, is not relevant now. The Hon ble Supreme Court was dealing with A.Ys. 1993-94 1994-95 and it specifically noticed that : ` we may reiterate that it is not in dispute that s. 36(1)(vii) of 1961 Act applies both to banking and non-banking businesses . The statutory position has undergone change. Now clause (viia) of section 36(1) specifically deals with deduction : in respect of any provision for bad and doubtful debts made by (a) a scheduled bank .. . It provides deduction in respect of provision for bad and doubtful debts made by banks subject to certain conditions. For other assessees, the provisions of clause (vii) of section 36(1) apply. The assessee is admittedly not a scheduled bank and the ld. AR was fair enough to candidly accept that the case is covered under clause (vii) and not clause (viia). Going by the language of clause (vii) of section 36(1), as it stands for the relevant assessment year, there can be no deduction at the time of creating a provision for doubtful debts. The legislature has clarified this position beyond any shadow of doubt by retr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion of any deduction. Here is a case in which the assessee is claiming write off of an amount due from Customs Department. It goes without saying that no amount from a Government Department can be considered as irrecoverable under any circumstance so as to characterize it as a loss. We, therefore, following the view taken by the Tribunal in its order for the A.Y. 2002-03, uphold the disallowance. It is also clarified that a reversal of such a provision should not attract any tax as has been discussed qua the Provision for doubtful debts. In the like manner, it should also be ensured that there is no double deduction in view of the decision allowing deduction at the time of creation of a similar provision in relation to the A.Y. 2003-04. 12.1. Ground no. 28 of the assessee s appeal is against the confirmation of disallowance of a sum of ₹ 47,47,698/- on account of Mediclaim personal accidental insurance policy taken for the benefit of staff members. The AO disallowed this amount by treating it as a personal expense. The ld. CIT(A) upheld the disallowance by noticing that the assessee paid premium to National Insurance Company Ltd. and hence, the case falls u/s 36(1)(ib) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act deals with allowing of depreciation. It provides that depreciation in the case of any block of assets, including `Buildings , shall be allowed at such percentage on the `written down value thereof as may be prescribed. The term `written down value has been defined in section 43(6) of the Act in the case of any block of assets, to mean (i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted, (A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year ; (B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased. This provision indicates that increase in the block of assets is envisaged only by actual cost when an asset is acquired during the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n an asset is acquired from India, albeit with a loan obtained in foreign currency. Thus it is overt that forex loss in respect of assets acquired in India cannot be treated as cost of acquisition so as to increase the value of block of assets for entitling the assessee to depreciation. If the contention of the ld. AR is accepted that such increase due to forex loss is contemplated u/s 43(1) itself and there is no need to approach section 43A, then the very existence of section 43A becomes meaningless. Placement of a separate section 43A shows that increase in the actual cost due to forex loss, and that too at the time of making payment, is not permissible but for this provision, which applies only to an asset acquired from a country outside India only. As the assessee acquired Building in India, neither section 43 nor section 43A can apply and consequently no capitalization of such forex loss can be allowed. Our view is fortified by the judgment in the case of CIT vs. Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC) in which the Hon ble Supreme Court, noting the provisions of section 43A held that : `Sec. 43(1) defines actual cost for the purpose of grant of depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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